COVER OF ENTREPRENEURIAL RISKS - I mia · Purpose of Entrepreneurial Risk Management. In the...

COVER OF ENTREPRENEURIAL RISKSIMIA WGP 77

25th September 2012Rio de Janeiro Conference

Benedikt Schermutzki

Table of contents

1. Purpose of Entrepreneurial Risk Management

2. Types of Entrepreneurial Risks Affecting the Engineering Industry

3. Insurability Aspect

4. Specific Risks and Insurance

5. Conclusion and Outlook

Purpose of Entrepreneurial Risk Management

In the Engineering Industry:

25/9/2012 3Benedikt Schermutzki – Cover of Entrepreneurial Risks

Active entrepreneurial risk management to better identify, map, control and ultimately manage this complex risk environment.

The risks that each organization faces have become more complex.

Normally damage related

“Conventional” risk

Risk associated with profit-driven ventureRisk of financial natureTypically non-damage related such as project cost over-run, delay in completion, performance failure

Entrepreneurial Risk

Types of Entrepreneurial Risks affecting theEngineering Industry

4

Stake-holders

General ContractorOwner / Principal

Lender

Subcontractor/ Supplier

O&M

Operational RisksFinancial RisksContractual RisksEnvironmental Risks

Risk types

Benedikt Schermutzki – Cover of Entrepreneurial Risks 25/9/2012

Insurability Aspects I

Text le

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Is it a bet or an insurance product?

Risk

Refers to a situation where the probability of an outcome can be determined and therefore the outcome can be insured against.

Uncertainty

Refers to events whose probability cannot be known and as such disqualifies for insurability.

Risk ≠ Uncertainty


Insurability Aspects II

Text level

6

Risk partneringUnderwriting aspects Actuarial aspects

Must be risk, not uncertaintyAsymmetric informationRisk of changeMoral risk

IndependenceRandomnessMeasurabilityLarge number of risks

Motivation of insurersChance to win


SPECIFIC RISKS AND INSURANCE

Sabotage, Strike and Lockout

Text level

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Underwriting Considerations

Description of Risk Market and Products

Political RiskDepends on political, economical, sociological factorsDelay risk (even without physical damage)Carried by owner, contractor or both

Strike, Riots and Civil Commotions Extension (SRCC)Covers only material damage, no consequential lossTo some extent more comprehensive insurance solutions for e. g. strike available. Normally sold on stand-alone basis.

Socio-political situationEvents such as electionsLocation of project: Major city vs rural areaInsured projects itself prone to protests? E. g. nuclear


Design errors

Text level

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Defect vs damage,condition vs occurrenceMain risk drivers:

CAR: Designer’s errorEAR: Manufacturer’s error

DE1 – DE5LEG1 – LEG3Normally, full defects cover is not granted

(Sub-)Contractor’s experienceDesigner’s, Manufacturer’s experience, loss recordComplexity of projectPrototype technology involved?Does an independent technical inspector exist?


Subcontractor/Supplier Insolvency

Text level

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Insolvency of subcontractor / supplierInvolves

Additional costsDelayContractual uncertaintiesQuality risk

Subcontractor default insurance

Detailed subcontractor prequalification processQuality assurance programSelection processInsurance on portfolio basis


Volatility of Commodity Prices, Interest Rates, Inflation and Exchange Rates

Text level

11



Fluctuation of commodity prices might affect project costLong term debt can be affected by changing interest rates, affecting profitImpact on cost and profit if foreign currencies involved

HedgingTo some extent implicitly insuredALoP, DSU losses can heavily depend on commodity prices

Economic environmentStability of currencyCap for commodity prices


Non-fulfillment of agreed specifications

Text level

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Product specificationsEnvironmentalThroughputOutputQualityFinancialAvailability

Limited insurance market availableMainly via liquidated damages insurance

Type: Machinery, Plant, Structure, Fit-outClear measurement possible?Portfolio / Wholesale, no adverse selection


Cost overrun

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Owner:Can often push risk to contractor

Contractor:Risk with lump sum projectsProject delay

Specific risk: Unforeseen ground conditions

Sponsor (now disappeared)Non-damage force majeure insuranceLiquidated damages insurance for contractorNon-damage delay cover for ownerNo direct cost overrun insurance products available.

Contractual agreements between owner and contractorClose relationship insurer – insured


Insufficient Supply Chain Management and Transport Delay / Disruption

Text level

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Supply chain relations getting ever more global and complexInterruption of continuous construction processFailures can increase costs and/or cause delays

DSU/ALoP can include suppliers extensions. Applies for physical damage only.To limited extent available:

Supply chain insuranceTrade disruption insurance

Map critical supply chains and dependenciesAssessment of named suppliersExposure from political and economical perspectivesClear indemnity structure to be defined


Conclusion and Outlook

Traditional insurance markets “saturated”

Entrepreneurial types of cover can provide significant opportunities

Demand for non-traditional covers is vast

15

To move the boundaries of insurability significant investments need to be made in product development and new approaches

for risk assessment and pricing.


Workgroup members

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Chairman:

Benedikt Schermutzki (Munich Re)

Sponsor of the Executive Committee:

Max Benz (XL Group)

Workgroup Members:

John Forder (Willis)

Thomas Gebert (Zürich)

Karl-Christian Hertenberger (HDI-Gerling)

Stephan Lämmle (Munich Re)

Katia Luz (Odebrecht)

Federico Pereira (Hannover Re)

Daniela Reia (Odebrecht)

Carl-Johan Silfwerbrand (Allianz)

Darren Smart (Liberty)

Peter Tailby (ACR Retakaful)

John Timothy (Infrassure)

Francisco Triviño (XL Group)

Marina Zyuganova (Renaissance)

Dieter Spaar (HDI-Gerling)

25/9/2012Benedikt Schermutzki – Cover of Entrepreneurial Risks

THANK YOU VERY MUCH FOR YOUR ATTENTION

Benedikt Schermutzki

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